When insurance policies are not in concert: the sad song of instrumentality exceptions

7 minute read

REUTERS/Wolfgang Rattay

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March 4, 2022 - Joe has a little too much to drink at a very fun party. He loses his glasses but decides to drive home anyway. The road is blurry — is it the alcohol or his missing eyeglasses?

Suddenly, there is a loud crash, and the airbag knocks Joe unconscious. The other vehicle's driver is in bad condition. Joe's smartwatch and smart car both call 911.

A week later the other driver is out of the hospital, and Joe is out on bail. It is time to pay for the accident. Joe calls ... his homeowners insurance carrier?

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It may surprise you that some attorneys will, in fact, expect a bad driver's homeowner's insurer to cover this type of accident. But why?

Sometimes homeowners or business liability policies have higher policy limits than a bad driver's auto insurance. For example, many states have relatively low minimum required bodily injury liability auto insurance limits — often as little as $15,000 per person or $30,000 per accident. A seriously injured claimant looking for more money might be tempted to seek coverage under a homeowners policy with a $500,000 liability limit — even if the alleged liability is caused by a car on the highway nowhere near the insured home.

While auto policies usually limit coverage to auto-related liabilities, most homeowners policies do not restrict coverage to accidents that happen at home. Similarly, general liability policies insure businesses against a relatively wide range of liabilities.

Virtually all liability insurance policies have exclusions that narrow the scope of coverage, such as those that apply to the insured's conduct (e.g., intentional acts) or certain types of losses (e.g., damage to the insured's property). An "instrumentality" exclusion is a type of exclusion that bars coverage for certain liabilities arising from a device, which may be (or, in some instances, is expected to be) covered under another type of policy.

"Instrumentality" exclusions typically apply not only to the "use" of the instrumentality, but also the ownership, maintenance, possession, etc. These exclusions typically apply broadly to liabilities that "arise out of" the instrumentality.

The "motor vehicle" exclusion exemplifies an "instrumentality" exclusion. Applying the "motor vehicle" exclusion in a homeowners policy to a run-of-the-mill auto collision can be straightforward. But under unusual circumstances and with creative attorneys, courts are sometimes asked to rule that an instrumentality exclusion does not preclude insurance coverage for injuries resulting from the instrumentality.

Many courts have adopted the approach that, absent an additional cause to which the injury could be solely attributed (i.e., a second dangerous instrumentality), an injury caused by the excluded instrumentality is not covered. In the leading California Supreme Court case, State Farm Mutual Auto Ins. Co. v. Partridge, 10 Cal.3d 94 (1973), the insured had a gun with a modified quick-fire trigger in the car. The gun fired when the car hit a bump, injuring one of the passengers. Because the modified gun was independently dangerous and could have caused injury regardless of whether it was paired with a car, and because the injury was caused by a bullet that had been fired from the gun, the court held that the homeowners policy's motor vehicle exclusion did not bar coverage.

Under the Partridge approach, an instrumentality exclusion applies even if other negligent acts contribute to the injury, unless the other negligent acts cause injury through the insured's use of a non-excluded instrumentality.

The "motor vehicle" exclusion is probably the most common "instrumentality" exclusion. Most liability policies that are not designed to cover motor vehicle liabilities exclude liability arising from the use of a motor vehicle because drivers and businesses should have (or are at least expected to have) separate auto insurance. But homeowners and general liability policies often exclude liabilities arising from the use of other "instrumentalities" such as: (1) watercraft, (2) aircraft, and (3) mobile equipment exclusions.

For example, parents allegedly allow their adult son to drive a boat after drinking at their home. The son is driving the boat with his friend being pulled on an inner tube behind the boat. The inner tube strikes an object in the water, and the friend is seriously injured.

In Farmers Ins. Group v. Johnson, 43 Wn.App.39 (1986), a Washington appellate court addressed this drinking-boating-inner tubing scenario and held the watercraft exclusion in the parents' homeowners policy applied to bar coverage. The Johnson court held that "the obvious purpose of the watercraft exclusion was to limit the scope of liability for boating injuries."

The exclusions for various vehicles and mobile equipment sometimes overlap. But "instrumentality" exclusions are not limited to vehicles and equipment. Homeowners or general liability policies could possibly include firearms and controlled substances exclusions.

Many "instrumentality" exclusions bar coverage for something that should have been separately insured. At the most basic level, for example, homeowners and business owners who utilize vehicles are expected to also carry personal auto or commercial auto insurance. Similarly, a homeowner or business owner who has a boat is expected to carry a separate watercraft insurance policy.

On the other hand, some types of risks are unlikely to be covered by a more specialized policy, but they may still be subject to an instrumentality exclusion. Consider this example: A homeowner leaves their prescription pills in a place accessible to their guest. The guest, who is in a vulnerable mental state, takes too many of the pills and unfortunately passes away.

A Massachusetts court in Mass. Prop. Ins. Underwriting Ass'n v. Gallagher, 75 Mass.App.Ct. 58 (2009), addressed this issue and found that the homeowners policy does not cover the use of controlled substances even though the insured negligently left the pills unattended. The court in Gallagher affirmed a judgment in favor of the insurer, holding that the controlled substances exclusion precluded coverage.

While the insured's alleged negligence in leaving the pills out and available was grounds to impose liability, the fact "'[t]hat other causes for an injury also may exist does not preclude a determination that the injury arises out of activities excluded from coverage under the policy.'" (citation omitted).

Unlike the motor vehicle or watercraft exclusions, there is no widely available personal insurance policy that is specifically intended to cover the risk of injuries caused by illicit or controlled substances. As the Gallagher case underscores, not every dangerous instrumentality can easily be insured merely by purchasing the "right type" of insurance. Nevertheless, instrumentality exclusions in homeowners and general liability insurance policies are likely to be applied to broadly remove coverage for virtually all injuries or damage associated with the excluded instrumentality.

One way to minimize the impact of broad instrumentality exclusions that can eliminate coverage under homeowners or general liability policies is for insureds to purchase personal or commercial umbrella policies. An umbrella policy may offer higher limits and cover a broader range of potential liabilities, including liabilities arising out of the ownership, maintenance, or use of instrumentalities that might be excluded under a homeowners or general liability policy.

On the other hand, some umbrella policies may also exclude some instrumentalities or limit coverage for liabilities arising out of certain instrumentalities to the extent the underlying insurance policy covers the instrumentality. As a result, buying an umbrella policy may help, but it is not a substitute for properly insuring potentially dangerous instrumentalities such as cars and boats.

Erin Mindoro Ezra is a regular contributing columnist on insurance coverage for Reuters Legal News and Westlaw Today.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Erin Mindoro Ezra manages Berger Kahn's South Orange County office in Lake Forest, Calif., focusing on Insurance Coverage and Labor and Employment. She represents and advises clients in insurance coverage matters, particularly liability insurance, and counsels clients in connection with wage and hour disputes, investigations, discrimination, retaliation, and other employment matters. She can be reached at eezra@bergerkahn.com.

Nandita Nayyar is an associate with Berger Kahn in Lake Forest, focusing on Insurance Coverage and Examinations Under Oath. She advises insurance company clients regarding coverage issues under personal lines and commercial policies and conducts examinations under oath. She can be reached at nnayyar@bergerkahn.com.

Walker Macon is an associate with Berger Kahn, focusing on Insurance Coverage, Insurance Litigation, Business and Entertainment Contracts, and Labor and Employment. He has advised insurance company clients regarding coverage obligations under personal and commercial policies, represented insurance company clients in coverage-related litigation, and assisted business and entertainment clients regarding various contract needs and employment practices and requirements. He can be reached at wmacon@bergerkahn.com.